Fitch Rates Lennar's Proposed Senior Notes Offering 'BB+'

January 30, 2013 03:56 PM Eastern Standard Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB+' rating to Lennar Corporation's (NYSE:
LEN) proposed offering of a new issue of senior notes due 2018 and an
additional amount of its 4.750% senior notes due 2022. These issues will
be ranked on a pari passu basis with all other senior unsecured debt.
The notes will be guaranteed by some of Lennar's subsidiaries, but those
guarantees may be suspended or released under certain circumstances. Net
proceeds from the notes offering will be primarily used for working
capital and general corporate purposes, which may include the repayment
or repurchase of some of its outstanding senior notes.

The Rating Outlook is Stable. A full list of ratings is provided at the
end of this release.

SENSITIVITY/RATING DRIVERS

The ratings and Outlook for Lennar reflect the company's strong
liquidity position and improved prospects for the housing sector this
year and in 2014. The ratings also reflect Lennar's successful execution
of its business model, geographic and product line diversity, and much
lessened joint venture exposure.

There are still challenges facing the housing market that are likely to
moderate the early stages of this recovery. Nevertheless, Lennar has the
financial flexibility to navigate through the sometimes challenging
market conditions and continue to invest in land opportunities.

THE INDUSTRY

Fitch's housing forecasts for 2012 were raised a number of times during
the course of the year but still reflected a below-trend line cyclical
rise off a very low bottom. In a slowly growing economy with somewhat
diminished distressed home sales competition, less competitive rental
cost alternatives, and new and existing home inventories at historically
low levels, 2013 single-family housing starts should improve about 18%,
while new home sales increase approximately 22% and existing home sales
grow 7%. However, as Fitch has noted in the past, recovery will likely
occur in fits and starts.

Lennar has solid liquidity with unrestricted homebuilding cash of $1,147
million as of Nov. 30, 2012. The company also has an unsecured revolving
credit facility of $500 million that expires May 2015. The credit
facility may be increased to $525 million, subject to additional
commitments. As of Nov. 30, 2012, the company had a $150 million letter
of credit and reimbursement agreement with certain financial
institutions, which may be increased to $200 million, and also another
$50 million letter of credit and reimbursement agreement with certain
financial institutions that had a $50 million accordion feature. There
is also an additional $200 million letter of credit facility with
another financial institution. The company's debt maturities are
well-laddered, with about 23% of its senior notes (as of Nov. 30, 2012)
maturing through 2015.

HOMEBUILDING

The company was the third largest homebuilder in 2011 and primarily
focuses on entry-level and first-time move-up homebuyers. The company
builds in 16 states with particular focus on markets in Florida, Texas
and California. Lennar's significant ranking (within the top five or top
10) in many of its markets, its largely presale operating strategy, and
a return on capital focus provide the framework to soften the impact on
margins from declining market conditions. Fitch notes that in the past,
acquisitions (in particular, strategic acquisitions) have played a
significant role in Lennar's operating strategy.

Compared to its peers Lennar had above-average exposure to joint
ventures (JVs) during this past housing cycle. Longer-dated land
positions are controlled off balance sheet. The company's equity
interests in its partnerships generally ranged from 10% to 50%. These
JVs have a substantial business purpose and are governed by Lennar's
conservative operating principles. They allow Lennar to strategically
acquire land while mitigating land risks and reduce the supply of land
owned by the company. They help Lennar to match financing to asset life.
JVs facilitate just-in-time inventory management. Nonetheless, Lennar
has been substantially reducing its number of JVs over the last few
years (from 270 at the peak in 2006 to 36 as of Nov. 30, 2012). As a
consequence, the company has very sharply lowered its JV recourse debt
exposure from $1.76 billion to $66.7 million ($49.9 million net of joint
and several reimbursement agreements with its partners) as of Nov. 30,
2012. In the future, management will still be involved with partnerships
and JVs, but there will be fewer of them and they will be larger, on
average, than in the past.

The company did a good job in reducing its inventory exposure
(especially early in the correction) and generating positive operating
cash flow. In 2010, the company started to rebuild its lot position and
increased land and development spending. Lennar spent about $600 million
on new land purchases during 2011 and expended about $225 million on
land development during the year. This compares to roughly $475 million
of combined land and development spending during 2009 and about $704
million in 2010. During 2012, Lennar purchased approximately $999
million of new land and spent roughly $302 million on development
expenditures. Fitch expects land and development spending for 2013 to be
sharply higher than in 2012. As a result, Fitch expects Lennar to be
more than $500 million cash flow negative this year. Fitch is
comfortable with this strategy given the company's cash position, debt
maturity schedule and proven access to the capital markets.

RIALTO

During 2010, the company ramped up its investments in Rialto
Investments. More recently it has been harvesting the by-products of its
efforts. This segment provides advisory services, due-diligence, workout
strategies, ongoing asset management services, and acquires and
monetizes distressed loans and securities portfolios. (Management has
considerable expertise in this highly specialized business.)

In February 2010, the company acquired indirectly 40% managing member
equity interests in two limited liability companies in partnership with
the FDIC, for approximately $243 million (net of transaction costs and a
$22 million working capital reserve). Lennar had also invested $69
million in a fund formed under the Federal government's Public-Private
Investment Program (PPIP), which was focused on acquiring securities
backed by real estate loans. During the three months ended Aug. 31,
2012, the AB PPIP fund started unwinding its operations. During the
fourth quarter, Lennar finalized its last sales of the underlying
securities in the fund and made its final distributions to the partners,
including Lennar. On average the company had $61 million of its equity
invested in the fund and it has brought back all of that investment as
well as profits and fees totaling $112 million.

On Sept. 30, 2010, Rialto completed the acquisitions of approximately
$740 million of distressed real estate assets, in separate transactions,
from three financial institutions. The company paid $310 million for
these assets, of which $124 million was funded by a five-year senior
unsecured note provided by one of the selling financial institutions.
Rialto Investments had $594.8 million of debt, of which $111 million is
recourse to Lennar. In December 2012, Lennar completed the first closing
of its second real estate fund with initial equity commitments of
approximately $260 million (including $100 million committed by Lennar).

Rialto provides Lennar with ancillary income as well as a source of land
purchases (either directly or leveraging Rialto's relationship with
owners of distressed assets). Fitch views this operation as
strategically material to the company's operation, particularly as
housing activity remains at relatively low levels.

RENTAL ACTIVITIES AND LARGE MPCs

In addition to the homebuilding, financial services and Rialto operating
platforms, Lennar has been incubating a multi-family rental business
strategy (beginning in early 2011) as well as FivePoint Land Company
which manages large, complex master planned communities in the Western
U.S. (including the former Newhall Land and Farming Company).

The multi-family JV activities have a pipeline that exceeds $1 billion,
and over 6,500 apartments. At Nov. 30, 2012, Lennar had approximately
$30 million invested in this business and expects that investment to
rise to $100 million by the end of fiscal 2013. The company's long term
goal is to build a portfolio of income producing apartment properties
across the country.

GUIDELINES FOR FURTHER RATINGS ACTIONS

Future ratings and Outlooks will be influenced by broad housing market
trends as well as company specific activity, such as trends in land and
development spending, general inventory levels, speculative inventory
activity (including the impact of high cancellation rates on such
activity), gross and net new order activity, debt levels, free cash flow
trends and uses, and the company's cash position.

Positive rating actions may be considered if the recovery in housing is
maintained and is more robust than Fitch's current outlook, Lennar shows
continuous improvement in credit metrics (with leverage less than 3
times (x) and interest coverage in excess of 5x), and maintains a
healthy liquidity position.

Negative rating actions could occur if the recovery in housing
dissipates and Lennar maintains an overly aggressive land and
development spending program. This could lead to consistent and
significant negative quarterly cash flow from operations and
meaningfully diminished liquidity position (below $700 million).

Fitch currently rates Lennar as follows:

--Issuer Default Rating 'BB+';

--Senior unsecured debt 'BB+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.

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